Assume that the stock market index is trading at a level of 4,500. You can interpret this index level as a scaled price that was set at some point to 100 and appreciates as the stocks included in the index appreciate. The long-term risk-free rate is 1.3%. The aggregate earnings (scaled in the same way as the index level) of the firms in the stock market index are expected to be 132 next year and the payout ratio (dividends as a percentage of earnings) has been 45% and is expected to remain 45%. What additional assumptions can justify the stock market index level of 4,500? Show your calculations and explain your reasoning carefully
Assume that the stock market index is trading at a level of 4,500. You can interpret this index level as a scaled price that was set at some point to 100 and appreciates as the stocks included in the index appreciate. The long-term risk-free rate is 1.3%. The aggregate earnings (scaled in the same way as the index level) of the firms in the stock market index are expected to be 132 next year and the payout ratio (dividends as a percentage of earnings) has been 45% and is expected to remain 45%. What additional assumptions can justify the stock market index level of 4,500? Show your calculations and explain your reasoning carefully
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter8: Basic Stock Valuation
Section: Chapter Questions
Problem 3P
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Assume that the stock market index is trading at a level of 4,500. You can interpret this index level as a scaled price that was set at some point to 100 and appreciates as the stocks included in the index appreciate. The long-term risk-free rate is 1.3%. The aggregate earnings (scaled in the same way as the index level) of the firms in the stock market index are expected to be 132 next year and the payout ratio (dividends as a percentage of earnings) has been 45% and is expected to remain 45%. What additional assumptions can justify the stock market index level of 4,500? Show your calculations and explain your reasoning carefully
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